In a coverage dispute between two insurers, the court considered the impact of an endorsement excluding coverage for any loss that first manifested before the term of the policy. See Pa. Gen. Ins. Co. v. Am. Safety Indemn. Co., 2010 Cal. App. LEXIS 981 (Cal. Ct. App. June 28, 2010).
Whitacre Construction, a framing subcontractor, was insured under a CGL policy issued by Pennsylvania General Insurance Company from October 1998 through December 2001. During this time period, Whitacre entered a subcontract and completed the work on a construction project. Thereafter, Whitacre was insured by a CGL policy issued by American Safety Indemnity Company from December 2001 to December 2002.
Whitacre was sued in a construction defect case. The alleged defects included ceiling deflection, walls that were not perpendicular to the floor, and window framing problems. Whitacre tendered the suit to both insurers. Pennsylvania accepted the tender of the defense under a reservation of rights and ultimately paid the defense and settlement costs for Whitacre. American declined the tender, asserting there was no possibility of coverage under its policy. The underlying case eventually settled.
Thereafter, Pennsylvania sued American, seeking equitable contribution for a portion of the defense and indemnity costs it paid. The insurers disputed whether the damages allegedly caused by Whitacre first manifested during Pennsylvania's policy period.
American argued it was entitled to summary judgment because its policy covered only damages caused by an occurrence during the term of the policy, and expressly excluded coverage for any loss that first manifested before the term of its policy. It was undisputed that Whitacre's work was completed before the effective date of American's policy. Further, American argued the term "occurrence" in its policy referred to the underlying conduct that caused the resulting damage, rather than to the damage resulting from that conduct. Occurrence was defined in the policy as,
[A]n accident, including continuous or repeated exposure to substantially the same general harmful conditions that happens during the term of this insurance. "Property damage" . . . which commenced prior to the effective date of this insurance will be deemed to have happened prior to, and not during, the term of this insurance.
Pennsylvania, however, argued that because there was potential coverage under both policies, it was entitled to contribution from American.
The trial court granted summary judgment to American. The "occurrence" was the defective framing work performed by Whitacre which could arise no later than the time the framing work was completed.
On appeal, the pivotal issue was whether American's policy clearly provided that two separate triggers of coverage - the causal acts by Whitacre and the commencement of damages resulting from those acts - must happen during the policy period before a potential for coverage existed. American asserted its endorsement required that the occurrence cause property damage during the policy period before there was coverage. Here, Whitacre's causal conduct did not happen during American's policy period.
The California Court of Appeal disagreed with this analysis. The policy language could reasonably be interpreted to mean that resulting damage, not the causal conduct, was still a defining characteristic of the occurrence that must take place during the policy period. There was nothing in the endorsement stating that both the causal conduct and property damage must occur during the policy period. Instead, the policy language was reasonably susceptible to the interpretation that the trigger of coverage was damage to property, not the causal conduct. The facts on when the damage from the construction defects first commenced were in dispute. Accordingly, the trial court erred in granting summary judgment to American.
A couple of comments here. First, although not discussed in the decision, California courts have determined that construction defects are occurrences which are covered by CGL policies. See e.g., Pepperell v. Scottsdale Ins. Co.,, 73 Cal. Rptr. 2d 164 (Cal. Ct. App. 1998). As noted in a prior post, the Hawaii Intermediate Court of Appeals recently went the other way, determining that construction defects were not occurrences, but are related to breach of contract. Second, it is hard to imagine how the construction defects here (improper framing) could have manifested after Pennsylvania's policy period terminated. There was no suggestion of continuing property damage caused by the construction defects. So it seems logical that the property damage occurred no later than when the construction work was completed, i.e., during Pennsylvania's policy period. Although the Court of Appeal noted there were disputed issues of fact regarding when the property damage first commenced, the nature of the property damage was not further explained.
